Lennox - 10-Q quarterly report FY

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes þ No o

     As of July 29, 2005, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 62,419,542.

ASSETS

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

     The accompanying unaudited Consolidated Balance Sheet as of June 30, 2005, the accompanying unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004 and the accompanying unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 should be read in conjunction with Lennox International Inc.’s (the “Company” or “LII”) audited consolidated financial statements and footnotes as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004. The accompanying unaudited consolidated financial statements of LII have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results that may be expected for a full year.

     Certain prior-period balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information.

     The Company’s fiscal year ends on December 31 and the Company’s quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each three-month period are denoted by the last day of the respective calendar quarter.

     The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”) and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as amended (“SFAS No. 123”). Under APB 25, no stock-based compensation expense is reflected in net income for grants of stock options to employees because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant. Had the Company used the fair value based accounting method for stock compensation expense described in SFAS No. 123, the Company’s pro forma diluted net income (loss) per common and equivalent share would be as follows (in millions, except per share data):

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The pro forma information presented above is not necessarily indicative of the effects on reported or pro forma net earnings for future years.

     The Company operates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets: Residential Heating & Cooling, Commercial Heating & Cooling, Service Experts and Refrigeration. The Company’s management uses segment profit (loss) as the primary measure of profitability to evaluate operating performance and to allocate capital resources. The Company defines segment profit (loss) as a segment’s net earnings before interest expense, income taxes and other expense.

     Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit (loss) to net earnings (loss) for the three months and six months ended June 30, 2005 and 2004 are shown below (in millions):

     Total assets by business segment as of June 30, 2005 and December 31, 2004 are shown below (in millions):

     Components of inventories are as follows (in millions):

     Shipping and handling costs related to post-production activities are included as part of Selling, General and Administrative Expense in the accompanying Consolidated Statements of Operations in the following amounts (in millions):

     The changes in the carrying amount of the Company’s total warranty liabilities for the six months ended June 30, 2005 are as follows (in millions):

     The change in warranty liability that resulted from changes in estimates of warranties issued prior to 2005 was primarily due to revaluing warranty reserves based on higher material input costs.

     The Company has bank lines of credit aggregating $257.5 million, of which $1.0 million was borrowed and outstanding and $94.9 million was committed to standby letters of credit at June 30, 2005. Of the remaining $161.6 million, the entire amount was available for future borrowings after consideration of covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility in the amount of $225 million governed by agreements between the Company and a syndicate of banks. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets or pay dividends. There are no required payments prior to the expiration of the facility. The Company’s facility and promissory notes are secured by the stock of the Company’s major subsidiaries. The facility requires that LII deliver annual and quarterly financial statements, as well as compliance certificates, to the banks within specified time periods. LII believes that cash flow from operations, as well as available borrowings under its revolving credit facility, will be sufficient to fund its operations for the foreseeable future. The Company has included in Cash and Cash Equivalents in the accompanying unaudited Consolidated Balance Sheet as of June 30, 2005, $28.3 million of restricted cash primarily related to routine lockbox collections and letters of credit issued with respect to the operations of its captive insurance subsidiary, which expire on December 30, 2005. In July 2005, the Company amended and restated its credit facility. See Note 17 — Subsequent Event.

     Accounts and Notes Receivable have been shown in the accompanying Consolidated Balance Sheets, net of allowance for doubtful accounts of $19.5 million and $18.5 million as of June 30, 2005 and December 31, 2004, respectively. In addition, approximately $269 million of accounts receivable, as reported in the accompanying unaudited Consolidated Balance Sheet as of June 30, 2005, represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and may not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.

     Outokumpu Joint Venture Sale

     On June 7, 2005, the Company completed the previously announced sale of its 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland (Outokumpu) for $39.3 million and the Company recorded a pre-tax gain of $9.3 million which is included in (Gains), Losses and Other Expenses, Net in the accompanying Consolidated Statements of Operations. In connection with the sale, the Company entered into an agreement with Outokumpu related to joint remediation of certain existing environmental matters. In conjunction with the new agreement, the Company updated its estimate of its portion of the on-going remediation costs and recorded expenses of $2.2 million for the three months ended June 30, 2005.

     Service Experts

     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. The Company identified approximately 130 centers, whose primary business is residential and light commercial service and replacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, the Company had divested the remaining 48 centers. The operating results of the 48 centers that are no longer a part of Service Experts are classified as a Discontinued Operation in the accompanying Consolidated Statements of Operations. The related assets and liabilities for these centers are classified as Assets Held for Sale and Liabilities Held For Sale in the accompanying Consolidated Balance Sheets.

     A summary of net trade sales, pre-tax operating results and pre-tax loss on disposal of assets for the three months and six months ended June 30, 2005 and 2004, and the major classes of assets and liabilities presented as held for sale at June 30, 2005 and December 31, 2004, are detailed below (in millions):

     The following table details the Company’s pre-tax loss from discontinued operations for the three months and six months ended June 30, 2005 and 2004, and the cumulative amount incurred through June 30, 2005 (in millions):

     The income tax benefit on discontinued operations was zero and $1.1 million for the three months ended June 30, 2005 and June 30, 2004, respectively. The income tax benefit on discontinued operations was $0.6 million and $4.8 million for the six months ended June 30, 2005 and 2004, respectively. The income tax benefit on discontinued operations for the six months ended June 30, 2004 of $4.8 million includes a $1.5 million tax benefit related to goodwill impairment. Through June 30, 2005, proceeds from the sale of these centers totaled $25.9 million.

     Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income, adjusted for the interest expense and amortization of deferred financing costs associated with the Company’s convertible notes, by the sum of the weighted average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under the Company’s stock-based compensation plans and convertible notes. Emerging Issues Task Force Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” requires that contingently convertible debt securities with a market price trigger be included in diluted earnings per share, if they are dilutive, regardless of whether the market price trigger has been met. As of June 30, 2005, the number of shares attributable to convertible notes was 7,947,478. As of June 30, 2005, the Company had 65,171,639 shares outstanding of which 3,107,074 were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share data):

     Additionally, options to purchase 140,959 shares of common stock at prices ranging from $24.91 to $49.63 per share and 1,101,479 shares of common stock at prices ranging from $17.82 to $49.63 per share were outstanding for the periods ended June 30, 2005 and 2004, respectively, but were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been anti-dilutive. Similarly, for the six months ended June 30, 2004, all potentially dilutive securities, including 7,947,478 shares attributable to convertible notes, were excluded because their effects were anti-dilutive for that period.

     Comprehensive income (loss) is computed as follows (in millions):

     The Company evaluates the impairment of goodwill under the guidance of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) for each of its reporting units. As a result of the annual impairment tests required by SFAS No. 142, the Company recorded an impairment charge in the first quarter of 2004 associated with its Service Experts segment. This impairment charge reflected the segment’s performance below management’s expectations and management’s decision to divest of 48 centers that no longer matched the realigned Service Experts business model. See Note 9 — Divestitures. The impairment test requires a two-step process. The first step compares the fair value of the units with goodwill against their aggregate carrying values, including goodwill. The Company estimated the fair value of its Service Experts segment using the income method of valuation, which includes the use of estimated discounted cash flows. Based on the comparison, the carrying value of Service Experts exceeded its fair value. Accordingly, the Company performed the second step of the test, comparing the implied fair value of Service Experts goodwill with the carrying amount of that goodwill. Based on this assessment, the Company recorded a non-cash impairment charge of $208.3 million ($185.1 million, net of tax), which is included as a component of operating income in the accompanying Consolidated Statements of Operations. The Company also recognized a $13.3 million ($11.8 million, net of tax) goodwill impairment charge arising from goodwill allocated to centers held for sale. This amount is included as a part of loss from discontinued operations in the accompanying Consolidated Statements of Operations. During the first quarter of 2005, the Company performed its annual goodwill impairment test and determined that no further impairment charge was required.

     The changes in the carrying amount of goodwill related to continuing operations for the six months ended June 30, 2005, in total and by segment, are as follows (in millions):

     Effective December 31, 2003, the Company adopted Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods. The 2005 pension benefit information provided in the table below includes the Company’s foreign operations; however, the 2004 information does not include the periodic pension benefit costs for the foreign operations of $1.2 million for the 2004 fiscal year.

     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, Financial Accounting Standards Board Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“SFAS 106”) was issued which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The Company has elected not to reflect the changes in the Act as the effects of the Act are not a significant event that calls for remeasurement under SFAS 106. Therefore, the accumulated postretirement benefit obligation and net postretirement benefit costs in the accompanying consolidated financial statements and above disclosure do not reflect the effects of the Act on the Company’s plans.

     For its investments in four joint ventures, the Company records its equity in the earnings of the joint ventures as a component of Selling, General and Administrative Expense in the accompanying Consolidated Statements of Operations. The Company recorded $8.2 million and $6.9 million of equity in earnings of its affiliates for the six months ended June 30, 2005 and 2004, respectively.

     The Company owns a 20% common stock ownership interest in Kulthorn Kirby Public Company Limited, a Thailand company engaged in the manufacture of compressors for refrigeration applications. The Company previously accounted for its investment in Kulthorn Kirby Public Company Limited as a marketable equity security investment. In October 2004, the Company purchased an additional 1.3% common stock interest for $1.5 million. The Company has adjusted prior years’ information to reflect the change to equity accounting. The change increased earnings of affiliates by $0.5 million and $1.3 million for the three months and the six months ended June 30, 2004, respectively.

     The carrying amount of investments in affiliates as of June 30, 2005 and December 31, 2004 was $40.4 million and $63.0 million, respectively, and is included in long-term Other Assets in the accompanying Consolidated Balance Sheets. The decrease in the investment in affiliates from December 31, 2004 to June 30, 2005 was primarily due to the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland. See Note 9 — Divestitures.

     The Company is involved in various claims and lawsuits incidental to its business. In addition, the Company and its subsidiary Heatcraft Inc. have been named in four lawsuits in connection with its former heat transfer operations. The lawsuits allege personal injury resulting from alleged emissions of trichloroethylene, dichloroethylene and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. It is not possible to predict with certainty the outcome of these matters; however, based on present knowledge, management believes that it is unlikely that resolution of these matters will result in a material liability for the Company. As of June 30, 2005, no accrual has been made for these matters. The Company anticipates the future legal fees in defense of these matters could be significant.

     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line

manufactured in Burlington, and close the Burlington facility. These actions were substantially complete as of June 30, 2005. In connection with the plant closure, the Company recorded pre-tax restructuring-related charges of $2.2 million, which are included in Restructuring Charge in the accompanying Consolidated Statements of Operations. As of June 30, 2005, the Company had $1.4 million in restructuring reserves, which are included in Accrued Expenses in the accompanying unaudited June 30, 2005 Consolidated Balance Sheet. The Company expects that these actions will reduce costs and enhance profitability.

     In July 2005, the Company amended and restated its revolving credit facility to, among other things, increase the borrowing capacity from $225 million to $400 million and extend the maturity date from September 2006 to July 2010. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company’s option, either (a) the greater of the bank’s prime rate or the federal funds rate plus 0.5%, or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets and make certain payments, including amounts for share repurchases and dividends. The Company’s facility is secured by the stock of the Company’s major subsidiaries. The facility requires that LII annually and quarterly deliver financial statements, as well as compliance certificates, to the banks within specified time periods.

     LII participates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. The first reportable segment is Residential Heating & Cooling, in which LII manufactures and markets a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the United States and Canada. The second reportable segment is Commercial Heating & Cooling, in which LII manufactures and sells primarily rooftop products and related equipment for light commercial applications. Combined, the Residential Heating & Cooling and Commercial Heating & Cooling segments form LII’s Heating and Cooling business. The third reportable segment is Service Experts, which includes sales and installation of, and maintenance and repair services for, HVAC equipment. The fourth reportable segment is Refrigeration, in which LII manufactures and sells unit coolers, condensing units and other commercial refrigeration products.

     Improving the performance of the Service Experts business segment remains a top priority of LII’s management. In the first fiscal quarter of 2004, LII’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII identified approximately 130 centers, whose primary business is residential and light commercial service and replacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, LII had divested the remaining 48 centers. The operating results of the 48 centers that are no longer a part of Service Experts are classified as a Discontinued Operation. See “Results of Operations — Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004 — Loss from Discontinued Operations” and “ — Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004 — Loss from Discontinued Operations” for more detail regarding Service Experts’ discontinued operations.

     In addition to the realignment of dealer service centers discussed above, the Service Experts business segment continues to implement the rollout of a program focused on the sharing of best practices across all residential service and replacement service centers. This rollout began mid-year in 2003 and was completed at most of the U.S. service centers in the third quarter of 2004. Rollout of the program to the Service Experts Canadian service centers is currently underway and is expected to be completed during the third quarter of 2005. Other initiatives in 2005 include increasing focus on revenue generating activities and continuing to strengthen the leadership at Service Experts through its general manager development program. This general manager development program graduated its first class in the latter part of 2004 and its second class during the first quarter of 2005. These general managers have assumed leadership positions at dealer service centers. A third class is scheduled to commence during the third quarter of 2005.

     During the first quarter of 2004, LII evaluated the impairment of goodwill under the guidance of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and determined that the carrying value of Service Experts’ goodwill exceeded its fair value. As a result, LII recorded a pre-tax, non-cash charge of $208.3 million for the six months ended June 30, 2004 in the Company’s Service Experts business segment. The impairment charge was driven primarily by lower than expected operating results as well as the turnaround plan discussed above. The tax benefit of this charge was $23.2 million. The $208.3 million pre-tax goodwill impairment charge is included in LII’s Loss from Continuing Operations for the six months ended June 30, 2004. Subsequent to the recognition of the $208.3 million goodwill impairment under SFAS No. 142 and as part of the realignment of service centers discussed above, LII also recognized $13.3 million in pre-tax goodwill impairment included in its $23.1 million pre-tax loss on discontinued operations under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), resulting in a total pre-tax goodwill impairment charge of $221.6 million for the six months ended June 30, 2004. During the first quarter of 2005, LII performed its annual goodwill impairment test and determined that no further goodwill impairment was necessary.

     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the Burlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to be material. In connection with the plant closure, the Company recorded pre-tax restructuring-related charges of $2.2 million for the six months ended June 30, 2005 which are included in Restructuring Charge in the accompanying Consolidated Statements of Operations. The tax benefit of this charge was $0.8 million.

     On June 2, 2005, the Company announced that Harry J. Ashenhurst, the Company’s Chief Administrative Officer, would assume the additional responsibility of President and Chief Operating Officer of LII’s Refrigeration business segment while the Company conducts an internal and external search for a permanent replacement.

     On June 7, 2005, the Company completed the previously announced sale of its 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland (Outokumpu) for $39.3 million and the Company recorded a pre-tax gain of $9.3 million for the six months ended June 30, 2005, which is included in (Gains), Losses and Other Expenses, Net in the accompanying Consolidated Statements of Operations. The income tax provision on this gain was $2.3 million. In connection with the sale, the Company entered into an agreement with Outokumpu related to joint remediation of certain existing environmental matters. In conjunction with the new agreement, the Company updated its estimate of its portion of the on-going remediation costs and recorded pre-tax expenses of $2.2 million for the six months ended June 30, 2005. The income tax benefit of the remediation expenses was $0.8 million.

     On April 2, 2004 the Department of Energy announced that it will enforce a 13 seasonal energy efficiency rating or “SEER” standard for residential central air conditioners. This standard, which will apply to central air conditioners manufactured after January 23, 2006, increases by 30 percent the SEER standard that applies to models produced currently. Although this new standard creates several engineering, manufacturing and marketing challenges for the Company, the Company anticipates it will meet the new regulation by January 23, 2006. The Company is also using the new standard as an opportunity to redesign its entire line of cooling products to standardize product platforms across its brands and to integrate other improvements in its products. The Company projects total expenditures for property, plant and equipment in 2005 to be approximately $80 million, driven largely by increased expenditures in connection with this redesign effort.

     LII’s customers include distributors, installing dealers, property owners, national accounts and original equipment manufacturers. LII recognizes sales revenue when products are shipped or when services are rendered. The demand for LII’s products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer confidence. In addition to economic cycles, demand for LII’s products and services is seasonal and dependent on the weather. Hotter than normal summers generate strong demand for replacement air conditioning, refrigeration products and services and colder than normal winters have the same effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR sales and services.

     The principal components of cost of goods sold in LII’s manufacturing operations are component costs, raw materials, factory overhead, labor and estimated costs of warranty expense. In LII’s Service Experts segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in LII’s manufacturing processes are steel, copper and aluminum. Higher prices for these commodities and related components continue to present a challenge to LII. Commodity prices and related component costs in LII’s manufacturing businesses increased by approximately $39 million for the six months ended June 30, 2005 compared to the same period in 2004. LII is mitigating the impact of higher commodity prices in 2005 through a combination of price increases, improved production efficiency and cost reduction initiatives. Warranty expense is estimated based on historical trends and other factors.

     LII’s fiscal year ends on December 31 and its interim fiscal quarters are each comprised of 13 weeks. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the calendar quarter.

     The following table sets forth, as a percentage of net sales, LII’s statements of operations data for the three months and six months ended June 30, 2005 and 2004:

     The following table sets forth net sales by business segment and geographic market (dollars in millions):

     Net sales increased $62.4 million, or 7.7%, to $867.8 million for the three months ended June 30, 2005 from $805.4 million for the comparable period in 2004. Excluding the favorable impact of foreign currency translation, net sales increased $49.8 million, or 6.2%, compared to the same period in 2004. As discussed below, net sales were significantly higher in the Company’s Residential Heating & Cooling and Commercial Heating & Cooling business segments, flat in the Company’s Service Experts business segment and higher in the Company’s Refrigeration business segment for the three months ended June 30, 2005, compared to the three months ended June 30, 2004.

     Net sales in the Residential Heating & Cooling business segment increased $34.1 million, or 8.5%, to $434.7 million for the three months ended June 30, 2005 from $400.6 million for the three months ended June 30, 2004. Excluding the favorable impact of foreign currency translation, net sales increased $30.3 million, or 7.6%, compared to the three months ended June 30, 2004. Net sales of the Company’s Lennox brand of heating and cooling products were particularly strong due in large part to price increases in response to higher commodity prices, market share improvement and favorable weather in June. LII’s Residential Heating & Cooling businesses benefited from favorable weather in June in the central, northeast and Great Lakes regions of the U.S. According to the National Oceanic and Atmospheric Administration’s Climate Prediction Center, total U.S. cooling degree days, on a population-weighted basis, were 24% higher in the month of June 2005 compared to the month of June 2004.

     Net sales in the Commercial Heating & Cooling business segment increased $20.3 million, or 13.5%, to $171.2 million for the three months ended June 30, 2005, compared to the three months ended June 30, 2004. After excluding the favorable impact of foreign currency translation, net sales increased $18.2 million, or 12.1%, compared to the three months ended June 30, 2004. The increase in net sales was due primarily to strong domestic sales growth driven by an increase in sales to national accounts and to commercial mechanical contractors, and price increases in response to higher commodity prices. Although net sales in the Company’s European operations for the three months ended June 30, 2005 were higher compared to the same period last year, general market conditions in Europe remain depressed, particularly demand for chillers.

     Net sales in the Service Experts business segment were relatively flat at $167.8 million for the three months ended June 30, 2005, compared to $167.6 million for the three months ended June 30, 2004. Net sales declined $2.1 million, or 1.3%, after excluding the favorable impact of foreign currency translation. The decline in net sales was due primarily to lower commercial new construction activity as a result of the increased focus on service and replacement opportunities in the residential and light commercial markets.

     Refrigeration business segment net sales increased $8.9 million, or 8.2%, to $116.9 million for the three months ended June 30, 2005, compared to $108.0 million for the three months ended June 30, 2004. After excluding the favorable impact of foreign currency translation, net sales increased $3.9 million, or 3.6%, compared to the three months ended June 30, 2004. Net sales were higher in the Company’s North and South American operations due primarily to growth in original equipment manufacturer sales that service the supermarket, walk-in refrigeration and cold storage market segments, as well as price increases in response to higher commodity prices. Net sales were lower, after adjusting for the impact of foreign currency translation, in the Company’s European operations due to depressed market conditions.

     Gross profit was $294.0 million for the three months ended June 30, 2005 compared to $275.3 million for the three months ended June 30, 2004, an increase of $18.7 million. Gross profit margin declined 0.3 percentage points from 34.2% for the three months ended June 30, 2004 to 33.9% for the three months ended June 30, 2005. Gross profit margin declined in the Company’s Commercial Heating & Cooling business segment and increased in all other business segments. Higher commodity prices continue to challenge LII’s manufacturing businesses as commodity prices increased by approximately $19 million for the three months ended June 30, 2005, compared to the same period in 2004. LII was able to offset the higher commodity prices through price increases; however, overall, the price increases did not sufficiently cover the gross profit margin on the incremental revenue and other cost increases.

     In the Company’s Residential Heating & Cooling business segment, gross profit margins improved 0.4 percentage points for the three months ended June 30, 2005, compared to the same period in 2004 due primarily to price increases and increased factory productivity more than offsetting the commodity price increases. Gross profit margins declined 1.1 percentage points in the Company’s Commercial Heating & Cooling business segment over the same period due primarily to higher commodity prices as well as less favorable factory efficiency as production was ramped up to meet domestic demand. These factors were partially offset by price increases and higher volumes. In the Company’s Service Experts business segment, gross profit margin improved 0.2 percentage points over the same period due primarily to prices increases more than offsetting the higher costs of heating and cooling equipment related to higher commodity prices as well as other cost increases. In the Company’s Refrigeration business segment, gross profit margin improved 0.2 percentage points over the same period due primarily to price increases, favorable product mix and the favorable impact of foreign currency fluctuations more than offsetting the commodity price increases.

     LIFO (last in, first out) inventory liquidations did not have a material impact on gross profit margins. The Company’s gross profit margin may not be comparable to the gross profit margin of other entities, because some entities include all of the costs related to their distribution network in cost of goods sold, whereas the Company excludes a portion of such costs from gross profit margin, including such costs in the Selling, General and Administrative Expense (“SG&A”) line item instead. For more information, see Note 5 — Shipping and Handling in the Notes to Consolidated Financial Statements.

     SG&A expenses were $224.9 million for the three months ended June 30, 2005, an increase of $15.8 million, or 7.6%, from $209.1 million for the three months ended June 30, 2004. The $15.8 million increase in SG&A expenses was due primarily to higher distribution, selling and marketing expenses of $11.6 million driven by the higher sales volumes and $3.1 million of unfavorable foreign currency translation (part of which is included in the higher distribution, selling and marketing expenses) and expenses associated with personnel changes. SG&A for the three months ended June 30, 2004 included approximately $4 million of investigation costs related to the Service Experts operations. As a percentage of total net sales, SG&A expenses of 25.9% for the three months ended June 30, 2005 were down slightly from 26.0% in the same period in 2004. The Company has no significant concentration of credit risk among its diversified customer base.

     (Gains), losses and other expenses, net were a pre-tax gain of $8.7 million for the three months ended June 30, 2005 which included a $9.3 million pre-tax gain on the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu, $2.2 million of pre-tax expenses representing the Company’s updated estimate of its portion of the on-going remediation costs in conjuction with the joint remediation agreement the Company entered into with Outokumpu and other items primarily related to the Company’s former Heat Transfer business segment. The total income tax provision on these items was $1.7 million.

     Due to the competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the Burlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to be material. In connection with the plant closure, the Company recorded a pre-tax restructuring-related charge of $2.2 million for the three months ended June 30, 2005. The tax benefit of this charge was $0.8 million.

     Interest expense, net, decreased $4.3 million from $8.9 million for the three months ended June 30, 2004 to $4.6 million for the three months ended June 30, 2005. The lower interest expense was due primarily to lower average debt levels and the absence of $1.9 million of make-whole expenses for the three months ended June 30, 2004 related to the Company’s $35 million pre-payment of its long-term debt in June 2004, which was scheduled to be repaid in the third quarter of 2005. As of June 30, 2005, total debt of $275.2 million was $41.8 million lower than total debt as of June 30, 2004.

     Other income was $0.6 million for the three months ended June 30, 2005 and $0.7 million for the three months ended June 30, 2004. Other income includes foreign currency exchange gains or losses, which relate principally to the Company’s operations in Canada, Australia and Europe, and expenses related to minority interest holders.

     The provision for income taxes on continuing operations was $26.6 million for the three months ended June 30, 2005, compared to $21.8 million for the three months ended June 30, 2004. The effective tax rate on continuing operations was 37.2% and 37.6% for the three months ended June 30, 2005 and June 30, 2004, respectively. These effective rates differ from the statutory federal rate of 35% principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

     On June 30, 2005, Ohio enacted legislation changing its tax system. As a result of this legislation and in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), a provision for income taxes of $1.6 million was recorded for the three months ended June 30, 2005.

     The American Jobs Creation Act of 2004 (P.L. 108-357, the “AJCA”) was signed into law on October 22, 2004. The AJCA provides an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against the repatriated amount. The Company is evaluating the effects of the repatriation provision and expects to make a decision on implementation later in 2005. As a result, the related range of income tax effects of such repatriation cannot be reasonably estimated at the time of issuance of the accompanying consolidated financial statements, and, as provided for in Financial Accounting Standards Board Staff Position No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”), no income tax expense related to the possible repatriation has been recorded as of June 30, 2005.

     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII

identified approximately 130 centers, whose primary business is residential and light commercial service and replacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, the remaining 48 centers were sold and are classified as a Discontinued Operation.

     Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the operating results of the 48 centers that are no longer a part of the Service Experts business segment for all periods presented are reported as discontinued operations in LII’s Consolidated Statements of Operations. The following table details the Company’s pre-tax loss from discontinued operations for the three months ended June 30, 2005 and 2004, as well as the cumulative pre-tax loss incurred through June 30, 2005 (in millions):

     Any future additional expenses are not expected to be material. The income tax benefit on discontinued operations was zero and $1.1 million for the three months ended June 30, 2005 and June 30, 2004, respectively. Through June 30, 2005, cumulative proceeds from the sale of the 48 centers totaled $25.9 million.

     Net sales increased $98.7 million, or 6.7%, to $1,568.1 million for the six months ended June 30, 2005 from $1,469.4 million for the same period in 2004. Excluding the favorable impact of foreign currency translation, net sales increased $77.8 million, or 5.3%, compared to the same period in 2004. Except for the Service Experts business segment, net sales were higher in all of the Company’s business segments for the six months ended June 30, 2005, compared to the six months ended June 30, 2004.

     Net sales in the Residential Heating & Cooling business segment increased $52.5 million, or 7.2%, to $777.4 million for the six months ended June 30, 2005 from $724.9 million for the six months ended June 30, 2004. Excluding the favorable impact of foreign currency translation, net sales increased $46.0 million, or 6.3%, compared to the six months ended June 30, 2004. Net sales increases were achieved by all of the Company’s major home comfort brands. Net sales of the Company’s Lennox brand of heating, cooling and hearth products were particularly strong due in large part to price increases in response to higher commodity prices. Also, as discussed previously, LII’s Residential Heating & Cooling businesses benefited from favorable weather in June 2005. Overall, LII’s Residential Heating & Cooling business segment outperformed the market. According to the Air-Conditioning and Refrigeration Institute, U.S. factory shipments of unitary air conditioners and heat pumps were down 4% January through June 2005, compared to the same period in 2004.

     Net sales in the Commercial Heating & Cooling business segment increased $37.6 million, or 14.5%, to $297.4 million for the six months ended June 30, 2005, compared to the six months ended June 30, 2004. After excluding the favorable impact of foreign currency translation, net sales increased $33.6 million, or 12.9%, compared to the six months ended June 30, 2005. The increase in net sales was due primarily to strong domestic sales growth, particularly in sales to national accounts, as well as an increase in sales to commercial mechanical contractors and price increases in response to higher commodity prices. Net sales in the Company’s European operations for the six months ended June 30, 2005 were also higher compared to the same period in 2004 although general market conditions remain difficult, particularly demand for chillers.

     Net sales in the Service Experts business segment declined $2.8 million, or 0.9%, to $303.7 million for the six months ended June 30, 2005 from $306.5 million for the six months ended June 30, 2004. Net sales declined $6.8 million, or 2.2%, after excluding the favorable impact of foreign currency translation. The decrease in net sales was due primarily to the sales shortfall in the first quarter of 2005.

     Refrigeration business segment net sales increased $11.6 million, or 5.3%, to $228.8 million for the six months ended June 30, 2005, compared to $217.2 million for the six months ended June 30, 2004. After excluding the impact of foreign currency translation, net sales increased $4.3 million, or 2.0%, for the six months ended June 30, 2005, compared to the same period in 2004. The Americas had higher net sales due primarily to growth in original equipment manufacturer sales that service the supermarket, walk-in refrigeration and cold storage market segments, as well as price increases in response to higher commodity prices. Net sales were lower, after excluding the favorable impact of foreign currency translation, in the Company’s European and Asia Pacific operations due to depressed market conditions.

     Gross profit was $515.8 million for the six months ended June 30, 2005, compared to $500.9 million for the six months ended June 30, 2004, an increase of $14.9 million. Gross profit margin declined to 32.9% for the six months ended June 30, 2005 from 34.1% in the same period in 2004. Gross profit margin declined in all of LII’s business segments over the same period with much of the decline occurring during the first quarter of 2005. Higher commodity prices continue to challenge LII’s manufacturing businesses as commodity prices increased by approximately $39 million for the six months ended June 30, 2005, compared to the same period in 2004. LII was able to offset the higher commodity prices through price increases; however, overall, the price increases did not sufficiently cover the gross profit margin on the incremental revenue and other cost increases.

     LIFO (last in, first out) inventory liquidations did not have a material impact on gross profit margins. The Company’s gross profit margin may not be comparable to the gross profit margin of other entities, because some entities include all of the costs related to their distribution network in cost of goods sold, whereas the Company excludes a portion of such costs from gross profit margin, including such costs in the SG&A line item instead. For more information, see Note 5 — Shipping and Handling in the Notes to Consolidated Financial Statements.

     SG&A expenses were $429.2 million for the six months ended June 30, 2005, an increase of $13.8 million, or 3.3%, from $415.4 million for the six months ended June 30, 2004. The $13.8 million increase in SG&A expenses was due primarily to higher distribution, selling and marketing expenses of $14.6 million driven by the higher sales volumes and $5.5 million of unfavorable foreign currency translation (part of which is included in the higher distribution, selling and marketing expenses) and expenses associated with personnel changes. SG&A for the six months ended June 30, 2004 included approximately $6 million of investigation costs related to the Service Experts operations. As a percentage of total net sales, SG&A expenses declined to 27.4% for the six months ended June 30, 2005 from 28.3% for the six months ended June 30, 2004. The Company has no significant concentration of credit risk among its diversified customer base.

     (Gains), losses and other expenses, net were a pre-tax gain of $8.7 million for the six months ended June 30, 2005 which included a $9.3 million pre-tax gain on the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu, $2.2 million of pre-tax expenses representing the Company’s updated estimate of its portion of the on-going remediation costs in conjunction with the joint remediation agreement the Company entered into with Outokumpu and other items primarily related to the Company’s former Heat Transfer business segment. The total income tax provision on these items was $1.7 million.

     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the Burlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to be material. In connection with the plant closure, the Company recorded a pre-tax restructuring-related charge of $2.2 million for the six months ended June 30, 2005. The tax benefit of this charge was $0.8 million.

     Goodwill impairment represents a pre-tax, non-cash, charge of $208.3 million for the six months ended June 30, 2004 in the Company’s Service Experts business segment, where lower than expected operating results occurred. The tax benefit of this charge was $23.2 million. During the first quarter of 2004, the Company conducted fair-value-based tests, which are required at least annually by SFAS No. 142, and determined that the carrying value of Service Experts’ goodwill exceeded its fair value. These fair-value-based tests were applied to all Service Experts service centers before consideration of the divestitures announced as part of the Company’s Service Experts turnaround plan. An additional $13.3 million of pre-tax goodwill impairment is included in the $23.1 million pre-tax Loss from Operations of Discontinued Operations discussed below resulting in a total pre-tax goodwill impairment charge of $221.6 million for the six months ended June 30, 2004. During the first quarter of 2005, LII performed its annual goodwill impairment test and determined that no further goodwill impairment was necessary.

     Interest expense, net, decreased $6.3 million from $16.4 million for the six months ended June 30, 2004 to $10.1 million for the six months ended June 30, 2005. The lower interest expense was due primarily to lower average debt levels and the absence of $1.9 million of make-whole expenses for the six months ended June 30, 2004 related to the Company’s $35 million pre-payment of its long-term debt in June 2004, which was scheduled to be repaid in the third quarter of 2005. As of June 30, 2005, total debt of $275.2 million was $41.8 million lower than total debt as of June 30, 2004.

     Other income was $0.5 million for the six months ended June 30, 2005, compared to $0.4 million for the same period in 2004. Other income includes foreign currency exchange gains, which relate principally to the Company’s operations in Canada, Australia and Europe, and expenses related to minority interest holders.

     The provision for income taxes on continuing operations was $31.0 million for the six months ended June 30, 2005, compared to a provision for income taxes on continuing operations of $2.7 million for the six months ended June 30, 2004. The effective tax rate on continuing operations was 37.1% and (1.9%) for the six months ended June 30, 2005 and June 30, 2004, respectively. Excluding the tax benefit of $23.2 million from goodwill impairment, the provision for income taxes on continuing operations would have been $25.9 million for the six months ended June 30, 2004 and the effective tax rate on continuing operations would have been 37.3% for the six months ended June 30, 2004. These effective rates differ from the statutory federal rate of 35% principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

     On June 30, 2005, Ohio enacted legislation changing its tax system. As a result of this legislation and in accordance with SFAS No. 109, a provision for income taxes of $1.6 million was recorded for the six months ended June 30, 2005.

     The AJCA was signed into law on October 22, 2004. The AJCA provides an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against the repatriated amount. The Company is evaluating the effects of the repatriation provision and expects to make a decision on implementation later in 2005. As a result, the related range of income tax effects of such repatriation cannot be reasonably estimated at the time of issuance of the accompanying consolidated financial statements, and, as provided for in FSP No. 109-2, no income tax expense related to the possible repatriation has been recorded as of June 30, 2005.

     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII identified approximately 130 centers, whose primary business is residential and light commercial service and replacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, the remaining 48 centers were sold and are classified as a Discontinued Operation.

     Under SFAS No. 144, the operating results of the 48 centers that are no longer a part of the Service Experts business segment for all periods presented are reported as discontinued operations in LII’s Consolidated Statements of Operations. The following table details the Company’s pre-tax loss from discontinued operations for the six months ended June 30, 2005 and 2004, as well as the cumulative pre-tax loss incurred through June 30, 2005 (in millions):

     The pre-tax loss of $1.9 million from discontinued operations for the six months ended June 30, 2005 was primarily related to salary, severance, legal and other related expenses. Any future additional expenses are not expected to be material. The income tax benefit on discontinued operations was $0.6 million and $4.8 million for the six months ended June 30, 2005 and 2004, respectively. The income tax benefit on discontinued operations for the six months ended June 30, 2004 of $4.8 million includes a $1.5 million tax benefit related to goodwill impairment. Through June 30, 2005, cumulative proceeds from the sale of the 48 centers totaled $25.9 million.

     LII’s working capital and capital expenditure requirements are generally met through internally generated funds and bank lines of credit.

     During the first six months of 2005, cash provided by operating activities was $66.0 million, compared to $55.3 million provided by operating activities in the same period in 2004. If the effects of the Company’s asset securitization program were excluded, the comparison would have been $66.0 million cash provided by operating activities in the first six months of 2005 and a usage of $79.7 million in the same period in 2004. The change is a reflection of better management of working capital. In June 2005, the Company sold its 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland for $39.3 million.

     Capital expenditures of $27.5 million and $14.6 million in the first six months of 2005 and 2004, respectively, were primarily for production equipment in the North American residential and refrigeration products manufacturing plants.

     During the three months ended June 30, 2005, the Company used $25 million for the repayments of long-term debt.

     As of June 30, 2005, the Company had bank lines of credit aggregating $257.5 million, of which $1.0 million was borrowed and outstanding and $94.9 million was committed to standby letters of credit. Of the remaining $161.6 million, the entire amount was available for future borrowings after consideration of covenant limitations as of June 30, 2005. Included in the lines of credit were several regional facilities and a multi-currency revolving credit facility in the amount of $225 million governed by agreements between the Company and a syndicate of banks. In July 2005, the Company amended and restated its revolving credit facility to, among other things, increase the borrowing capacity from $225 million to $400 million and extend the maturity date from September 2006 to July 2010. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company’s option either, (a) the greater of the bank’s prime rate or the federal funds rate plus 0.5%, or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets and make certain payments, including amounts for share repurchases and dividends. The Company’s facility is secured by the stock of the Company’s major subsidiaries. The facility requires that LII annually and quarterly deliver financial statements, as well as compliance certificates, to the banks within specified time periods.

     LII believes that cash flow from operations, as well as available borrowings under its revolving credit facility, will be sufficient to fund its operations for the foreseeable future. LII periodically reviews its capital structure, including its primary bank facility to ensure that adequate liquidity exists.

     The Company has included in cash and cash equivalents in the accompanying unaudited Consolidated Balance Sheet as of June 30, 2005, $28.3 million of restricted cash primarily related to routine lockbox collections and letters of credit issued with respect to the operations of its captive insurance subsidiary, which expire on December 30, 2005.

     Under a revolving asset securitization program, the Company had sold, at June 30, 2005 and 2004, respectively, zero and $135.0 million of receivables on a non-recourse basis. The receivables are sold at a discount from face value which aggregated $0.9 million and $1.0 million through the first six months of 2005 and 2004, respectively. The discount expense is shown as a component of Selling, General and Administrative Expense in the Consolidated Statements of Operations. The Company has no significant concentration of credit risk among its diversified customer base.

     In November 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Cost — an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. It also requires that allocation of fixed production overheads to inventory be based on the normal capacity of production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the provisions of this standard to determine the effects, if any, on the Company’s consolidated financial statements.

     In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement 143” (“FIN 47”). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. Also, if there is any uncertainty as to the amount and/or the timing of future settlement, it should be factored into the measurement of the liability when sufficient information exists. FIN 47 is required to be applied no later than the end of fiscal years ending after December 15, 2005, although early adoption is encouraged. The Company is evaluating the provisions of this standard to determine the effects, if any, on the Company’s consolidated financial statements.

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”), which revises Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” supersedes Accounting Principles Board 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flow.” SFAS 123R requires fair value of all share-based payments to employees, including the fair value of grants of employee stock options, be recognized in the income statement, generally over the option vesting period. On April 14, 2005, the Securities and Exchange Commission (“SEC”) amended the compliance dates for SFAS 123R. The SEC amendment allows companies to implement SFAS 123R at the beginning of their next fiscal year. Early adoption is permitted.

     SFAS 123R permits adoption of its requirements using one of two transition methods:

     The Company is currently evaluating the timing and manner in which it will adopt SFAS 123R.

     Various sections of this Quarterly Report on Form 10-Q (“Form 10-Q”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based upon management’s beliefs, as well as assumptions made by and information currently

available to management. All statements other than statements of historical fact included in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Such statements reflect the current views of LII with respect to future events, based on what it believes are reasonable assumptions; however, such statements are subject to certain risks, uncertainties and assumptions. In addition to the specific uncertainties discussed elsewhere in this Form 10-Q, the following risks and uncertainties may affect the Company’s performance and results of operations: